Asian shares jump, yields & dollar fall as Fed stuns

SYDNEY (Reuters) - Asian shares and currencies looked set to surge on Thursday after the U.S. Federal Reserve stunned markets and decided not to taper its asset-buying program, sending U.S. bond yields and the dollar into a tailspin.

The prospect of low U.S. rates for longer should be a major relief to emerging markets which have been suffering from capital flight back to the developed world, with shares in Mexico and Brazil already leading the way higher.

The Fed's decision to keep its asset buying at $85 billion a month was seen as a rebuff to the sharp rise in Treasury yields over recent months which was proving a headwind for the housing market and the economy in general.

"This is a major Fed protest against the tightening of financial conditions," said Alan Ruskin, global head of foreign exchange strategy at Deutsche Bank in New York.

"The Fed is very worried that recent tightening of financial conditions is sizable and, probably more important, the back-up in yields is too swift to be able to comfortably conclude that the economy will not slow too much."

The bond market got the message and 10-year Treasury yields tumbled 16 basis points to 2.69 percent. Futures contracts for the Fed funds rate and Eurodollars romped higher right out to 2016 as the market also pushed back the likely timing of the first hike in U.S. rates.

That in turn sent the dollar tumbling across the board. The euro shot up 1.2 percent to $1.3505, having hit its highest in almost eight months.

The dollar dropped a full yen to 98.15, a move that might restrain any rally in Japanese equities. Against a basket of currencies, the dollar shed a full percentage point (.DXY).